Things were no so rosy four years ago when the Gujarat-based clutch supplier to medium and heavy commercial vehicles had gone through a lot of turmoil.New Delhi: Udit Sheth is quite forthright when asked why his company’s share continues to languish at levels of INR 12 on the BSE.
The Vice Chairman of Setco Auto Systems responds matter-of-factly: “It is a very valid question, and sometimes even I wonder why is it not moving.” Yet, the silver lining in the cloud is that Setco “has now been revived” and recently reported its best quarter in terms of turnover and Ebitda (earnings before interest, taxes, depreciation and amortisation).
Udith Sheth, Vice Chairman of Setco Auto Systems“Our performance has far exceeded the market performance in terms of growth and we are actually beating our own budgeted numbers as a company now. We now have the best management team that we have ever had in the history of Setco,” says Sheth.
Things were no so rosy four years ago when the Gujarat-based clutch supplier to medium and heavy commercial vehicles had gone through a lot of turmoil. This was the time it had set up its state-of-the-art casting business. “We had a partnership with an European company who gave us the technical inputs but the person who was to lead the technology unfortunately met with a tragic death. Consequently, we were not able to ramp up and stabilise the factory,” continues Sheth.
The castings business is akin to a process industry — “it is not actually like proper manufacturing…you throw the metal and you machine it out. And whenever you start and stop, there are issues that come up in the equipment”.
Maintenance issues
These hyper start/stops led to massive maintenance issues and the castings entity, Lava Cast, became an NPA. Today, it has turned around and Sheth says the entire business has been restructured by the banks. Lava Cast is now giving the best yield as well as the lowest rejection rate that is “better than industry standards”.
To handle the losses incurred, Setco raised around INR 600 crore in 2021 from India Resurgence Fund, promoted by Bain Capital Credit and Piramal Enterprises. The exit IRR for that fund is about 23%. At a PAT level, says Sheth, Setco is not showing a a turnaround as it is at the EBITDA level, but “we are in the process right now to also do a debt augmentation so that the cost of money comes down”.
Once that happens, he expects to see “an enormous change” in the present outlook for Setco. “Piece to piece, we have solved all the problems we have,” he adds. According to him, the company is providing the entire 23% in the books though the actual outflow in terms of payment of interest is only 5%. This is why the hit is coming on the profit and loss account.
The company has a “lion’s share” of the clutch market in the medium and heavy commercial vehicle segment where it meets the needs of Tata Motors, Ashok Leyland, Eicher, Daimler India Commercial Vehicles and Mahindra & Mahindra.
Ravaging storm
“We have solved the problems at Lava Cast and Setco is now looking up towards a very exciting future,” says Sheth. From his point of view, the setbacks that occurred were like a fierce storm that ravaged the business without any kind of warning.
“At that time, we were not expanding too much and had an international partner to help out but then the tragedy which I mentioned already happened and we could not take things forward,” he says. This was followed by the change in rule on higher axle loads in trucks which lead to capacities falling in terms of supplies to OEMs. Trucks were carrying more goods and the turnaround time was higher because with GST in place, there was no octroi to act as an impediment.
“And then we were hit by COVID. So all three things came almost together. It was like a perfect storm and you cannot really plan for all of this, be it an untimely death or COVID,” adds Sheth.
Amidst all this turbulence, he acknowledges the role of banks which were “most supportive” as well as Setco’s customers who “stood by us and waited for us to recover”. Likewise, the entire workforce had enough faith to believe that their company would eventually turn around thanks to its strong fundamentals.
Teamwork pays off
“We had to put our blood, sweat and tears into the entire effort. I also went through a personal tragedy at that time but I recovered and focused on taking things to the next level. Eventually, it boils down to grit and teamwork,” says Sheth.
With business now on a better wicket, Setco is set to begin its next growth phase for the aftermarket where its vast pool of distributors, retailers and mechanics have a key role to play. “When we did our brand analysis, we were the second most valuable (brand) for parts,” he adds.
There is also a lot of technology and computer science integration happening in the clutch system which could help in the launch of a smart clutch “very quickly” in the market. Setco has R&D centres in Chennai (for Daimler and Ashok Leyland) and Kalol in Gujarat with plans to branch out to an office in Pune.
As Sheth puts it, all the pistons — HR, manufacturing, marketing and sales, and R&D — are working well in tandem. The other important initiative for the aftermarket is the launch of Setco Allied Parts where a host of components can be retailed beyond the clutch alone. These include flywheels, central bearings, brake linings, greases, lubricants, oils etc.
Brand power
“We are contract manufacturing at the highest quality standards but under the name of Setco because of its brand strength. Putting more parts into our distribution network is rewarding not only to the mechanic but also to the retailer and distributor,” he explains.
The company has now begun working with the tractor market and farm equipment sector where its dual clutches could play a vital part. With India’s tractor business growing briskly each year, Sheth believes that getting nearly 15% market of that market will be a huge bonus.
“It will then allow us to not only to be in India but also export our clutches and create a replacement market abroad. The idea is not to develop a single clutch over there but the dual clutch program because today’s farmers are choosing to drive the implements through the mechanical systems,” he says.
After all, the next generation does not want to “dirty its hands or sweat it out” which is perfectly understandable. With the likes of Mahindra, John Deere, Sonalika Tractors etc Setco is confident that the tractor story will become more and more robust in the next two years.
Opportunities in the US
Incidentally, the Setco unit in the US is already supplying OEM hydraulic parts to Caterpillar and now “they are knocking on our doors” to also meet their needs of castings. There could be huge opportunities in the future given that importing clutches into the US from India involves a levy of just 3% while this is nearly 10 times more for imports from China.
“The delta is so big that people have started approaching us. Many enquiries are coming in and we are sending samples for testing and validating. The cycle is a bit longer because they take it, test on their own equipments and then put it in the field for trials. So, but we will see some good amount of volumes from the US going forward,” says Sheth.
Setco exports its dual angular spring design as well as diaphragm spring design clutches to the US and Africa. “We are as good or better in terms of not only quality but also warranty service. People do not want to tinker with a manufacturer who is importing clutches but does not have a service set up. In our case, like in India, we have a service and manufacturing setup in the US,” he elaborates.
Realities of Europe
As for Europe, it is a “very tempting market” but competitors have a lion’s share and, additionally, supply the transmission along with the clutch. In this backdrop, a fleet owner would not be inclined to source a clutch from a different supplier because the transmission person would then not give the warranty (on the transmission).
At present, the US, the Middle East and Africa are top priorities for Setco where it is working very closely with the customer base. The aftermarket opportunity in the Middle East and Africa is particularly huge because Indian trucks operate in these countries and need to be serviced.
Sheth is pleased with the pace of progress of new orders but chooses to remain circumspect. “I am still solving problems that we had incurred in the past; we are slowly coming out of them and thanks to the confidence of everyone right from the Setco team to investors, things are now moving in the right direction,” he says. Whether this will result in the share price moving upwards remains the million dollar question.
